Bollinger Bands
Bollinger Bands Bollinger Bands are generally plotted as two standard points away from a
simple moving average (SMA). Bollinger Bands can adjust themselves to current
market conditions as standard deviation is measured by volatility. Bollinger
Bands contract during less volatile periods & widen during volatile periods.
Most of the time you’ll see Bollinger Bands with a simple moving average in
the center. Most swing traders use Bollinger Bands over a 10 day period but they
can also be used effectively on intraday trading charts.
The whole picture is not provided using Bollinger bands, its important that
we use other indicators such as
Stochastic, SMA, RSI or Money Flow to
get a better view of the markets. Usually when a stock touches one of the
Bollinger Band lines, this is an indication of a continuation or a reversal in
the other direction. Use both RSI & MACD to confirm this. The RSI indicator will give you a good
idea of the current over bought or over sold level. Usually if the stock
price touches the Upper Bollinger Band & the RSI is below 70 the trend will
continue. If the stock price touches the lower band & the RSI is above 30 then
the opposite will happen. Conversely, when the price touches the upper band and
RSI is near 75-80, the trend may reverse itself and move downward. The same
condition exists when the price touches the lower band and RSI is below 25-20.
Note: Bollinger Bands are
used to confirm trading signals & work best with other indicators.
Chart courtesy of
StockCharts.com
Important:
When using
Bollinger Bands its important to know that they
are calculated using a specified number of calculated deviations above & below
the moving average which will cause them to widen when prices are volatile &
contract when prices are stable.
A contracting band is a sign that the market is about to
trend. Usually the bands will meet up into a narrow neck which will be followed
by a sharp price movement. Note that the first break out will usually be a false
start, preceding a strong trend in the opposite direction. Also in a ranging
market if a stock price starts at one band it normally carries through to the
other. A move outside the band indicates that the trend is strong.
If a trend hugs the upper band, this signals that the trend
is strong, use the other indicators to confirm this.
|
